May 17, 2005

“Open” vs. “Closed” Distribution: Part II

In the last post I attempted to describe the difference
between “open” and “closed” distribution networks. I believe the differences that exist between
these two approaches are a driving force behind the long tail phenomenon and,
importantly, critical to understanding evolving economic models that will drive
content production, distribution, and consumption within the next couple of
decades. In this post I’m laying a
little more foundation as to the reason why closed networks have dominated and
why open networks are ascending. In the
next post I’ll discuss how the economics of open networks will operate.

Part II: The Ascendance
of “Open” Media Distribution Networks

Closed distribution has ruled the roost for a long
time. Look around at all the major
sources of content that inundate your life. Most of them have relied on closed distribution mechanisms until the
last decade (I’ll get to video games in another post).

Text

Book, magazine, and newspaper
content has been produced by large publishers who distributed the publications
through expensive physical outlets. If
you wrote something interesting, you would need to be granted access to this
closed network to be heard by a broad audience.

Audio

Terrestrial (and now satellite)
radio and portable audio (tapes, CDs) content has been produced large corporate
publishers who distributed this content via scarce airwaves and expensive
physical outlets. As with books and
magazines, if you had something interesting to say, you needed access to these
closed networks to say it to a large audience.

Video

Broadcast, cable, satellite, and
portable video (VHS, DVDs) content has also been produced by corporate giants
who have distributed this content via scarce airwaves, proprietary networks,
and expensive physical outlets. As with
both text and audio, interesting video required access to these networks to
reach a broad audience.

Why This Has Been
Logical

In each of these cases, available distribution mechanisms
were inherently one way, they were analog hub-and-spoke architectures. Distribution infrastructure was expensive to
create and manage; as a result, only organizations that could absorb the
associated capital outlays grew up to around these networks. As time progressed, these companies had
incentive to scale their networks to achieve superior economic returns. But as they reached more people, they had to deliver
content that appealed to larger numbers of consumers or risk inefficient
utilization of these enormously expensive networks.

These requirements forced similar consolidation and growth
within content production. High
production standards and sensory impact combined with simplistic themes and
slick marketing campaigns to entertain the common denominator amongst millions
of potential consumers. And all this
stuff, it turns out, is also very expensive and very risky; to absorb the
financial risk associated with such efforts required equally deep pockets. Symbiotic relationships between content
owners and distributors were obvious and often resulted in outright
combinations.

Welcome to the age of the media behemoth. In a closed network, everything points to bigger
= better. The bigger you are and the
more entrenched your position in the market, the greater your incentive to
maintain status quo, to keep the networks closed and dominated by yourself and
a few other competitors (to keep the regulators happy). And as evidenced by the actions of the
current network operators and content owners, you’ll actually fight like hell
to keep it.

What’s Changed?

The fact is, these massive closed networks have become very
efficient at delivering content that appeals to lots of people. You can certainly argue that this content has
steadily declined in quality, but people still watch 8 hours of TV on an
average day and shows like American Idol draw tens of millions of consumers to
Fox for two nights every week. Content
producers and distributors have had a lot of time to perfect their craft and have
become very good at taking advantage of the scale afforded by their massive
closed distribution systems. But
something ominous is happening.

Increasingly, closed networks are starting to lose their
grip on the consumer. In the last decade
(or so) an enormous open network (the Internet) has emerged and is quickly
supplanting closed networks as a rival (and increasingly superior) source of content. The impact of this network is only just
beginning to be felt, but the next decade will demonstrate the full implication
of this new global transport mechanism on legacy providers (both in production
and distribution).

Looking at these same three media categories today, we still
witness the dominance of closed distribution, but we also see the seeds of a
very different market emerging.

Text

Books, magazines, and newspapers
are still popular, but blogs have provided consumers with a simple method to
publish and promote their own written works by taking advantage of the inherent
bilateral communications of the Web. Within
a few years, blogs have exploded in popularity and demonstrated a clear ability
to draw consumer attention away from more traditional paper sources. But maybe most importantly, blogs have
demonstrated the wide range of topics consumers will find interesting once
given the choice.

Audio

Terrestrial and satellite radio
continue to draw listeners (although the overall market for radio is probably
not growing, but rather shifting) and labels still sell millions of CDs, but
open networks continue their relentless assault on legacy distribution. While companies such as Apple have taken a
half step (by layering a closed network atop an open infrastructure), millions
of consumers still turn to myriad networks such as Kazaa, eDonkey, and Morpheus
to share and download audio files. In
addition, Podcasting, a term that would have drawn nothing but blank stares in Silicon Valley even 18 months ago, has become a household
word (at least among radio and music execs) across the country. As with blogs, content selection is broad
based and growing quickly.

Video

Broadcast, cable, satellite and
DVDs still rule with an iron fist. However, increased broadband penetration has begun to reveal the
potential of open video distribution to a much larger audience. BitTorrent, which now accounts for over 53%
of all Internet traffic, according to Big Champagne, (vs. 19% for FastTrack,
another P2P app) has only accelerated this trend. Within the last 6 months, no less than two
dozen different companies have announced their intent to pursue the
distribution of video online (Cozmo Media included). While video may not expand at the same rate
as open text and audio networks (due to continuing bandwidth constraints), it
is still as unavoidable as either. As
with both text and audio, the selection of content promises to be orders of
magnitude larger than what is available today.

Where Does This Lead
Us?

Some closed networks will continue to operate for many
years. Some will be dominated by hybrids
that attempt to layer closed network architectures atop open networks. But such anachronisms are likely to survive
due to lingering market distortions driven by the dwindling (but substantial)
capital resources of closed network relics and plain old consumer resistance to
change. But given the overwhelming
advantage consumers experience within an open distribution network (largest
selection of cheap portable content paired with the ability to inexpensively
publish for a global audience), this transition is as inevitable as the
transition from analog to digital.

What promises to be the biggest challenge of this transition,
for both producers and distributors, will be the abrupt transition in economic
models. I do not believe that “open”
networks will operate in the same way as “closed” networks in that time and
attention comprise the primary currency in such environments. Maximizing the utility of these consumer
assets are the keys to success. In the
next post I’ll discuss how these economies seem to be evolving and why (IMHO) advertising
is going to be primary mechanism for monetizing time and attention.

Comments

That's interesting stuff Alex. My mind is still boggling! The consequences of this war between open and closed distribution may be far reaching, (will they let us win)?

Let me take a small city example to try to get some clarity in my thinking:

Today Fritz Schmidt is a young journalist employed by the main Nuremburg newspaper, the NZ, for a salary of €4000 a month. He has his own column and writes interesting aticles about local events and politics. The paper costs €1.50 and has a circulation of 250,000.

In 10 years the people who used to buy the NZ get all of their information from open media; the NZ has gone out of business.

What is Fritz living off and how are all those people paying for their (improved) info? There are of course more worrying questions like "what are all the newspaper kiosks selling?" and what about the folks that operated the paper logistics?" but that's out of scope!